WEAKNESSES

RISK ASSESSMENT

The recovery is not yet on the agenda

2015 is expected to be the sixth consecutive year of weak growth. The economy has not yet finished paying for the excesses of the period before the 2009 crisis. Debt reduction is continuing and credit has not yet taken off again. Domestic demand will slow. Public investment will be affected by the exhaustion of funds provided under the 2007-2013 European structural funds programme, while those due under the 2014-2020 programme will be delayed, especially as Brussels is critical of the tendering policy. Private investment will suffer from the credit squeeze caused by the bankruptcy of the country’s fourth biggest bank, which is causing the other institutions to step up their caution. The decisions of business leaders, like those of households, will also be marked by a lack of confidence. Exports, diversified with cereals, sunflower seed, tobacco, clothing, medicines, machinery, copper, steel, electricity and refined oil, are expected to be the most dynamic area of growth. However, their growth will be moderate because the main markets (Germany, Rumania, Italy, Greece and Turkey) will post weak growth. Tourism revenues could suffer from the scarcity of Russian visitors on the coast of the Black Sea.

Costly bank rescue

The public deficit increased in 2014, especially because of the banking crisis. In June 2014, as a consequence of the disturbing rumours circulating on the Internet, customers of the Corporate Commercial Bank (KTB) and of the First Investment Bank rushed to withdraw their money from the country’s 4th and 3rd largest banks. The authorities had to immediately put in place a line of credit intended to increase the banks’ liquidity and restore confidence. KTB, at which 2/3 of the assets were revealed as doubtful (these were said to be loans granted to companies belonging to the majority shareholder), has to be liquidated. At first, depositors will have to be reimbursed at an estimated cost of 4.3% of GDP, of which only half can paid from the deposit guarantee fund. The local banks, whose capital is often owned by people linked to the political sphere, have paid high interest rates on deposits in order to compete with the subsidiaries of Austrian, Hungarian and Italian groups, but to the detriment of their financial soundness. The resources necessary for rescuing them have been borrowed, sharply pushing up debt, the burden of which, nonetheless, remains weak. The new government is determined to stop the deterioration of the public accounts. Its task will be difficult in view of the deficit of the publicly owned businesses (electricity, railways, post office…) and inefficient tax collection. The squeeze is not expected to be too rapid, because the current prime minister had to leave power in 2013 against a background of popular discontent provoked by electricity price increases, while the previous government lasted only briefly.

Considerable foreign investments

The trade deficit (about 7% of GDP) and the revenue deficit, due to dividend repatriations by foreign investors and to interest payments on foreign debt are largely offset by income from tourism and remittances by the large number of emigrants who left the country for the west after the opening of the borders, as well new foreign direct investments, which amount to 100% of GDP. This helps to top up the foreign exchange reserves and to ensure the credibility of the lev’s pegging to the euro since 1997. Despite bank deleveraging, external debt still amounts to nearly 100% of GDP. However, nearly half of it is made up intra-group loans in the context of foreign direct investments.

The political instability is not conducive to reform

Following the October 2014 elections, Boiko Borissov, who was already prime minister in 2013, heads a centre-right pro-European government based on his party, Citizens for the European Development of Bulgaria (GERB), the reformist block, Alternative for Bulgaria Renaissance and the Patriotic Front. The coalition has 137 seats out of 240, which should enable him to carry out budgetary reform. However, the coalition is not a monolith. The last two elections were brought forward following the break-up of the coalition in power. The fight against corruption and organised crime, the modernisation of the judiciary and the administration, the clean up of the banking landscape, which have made little progress since the country joined the EU in 2007, with a change of government after each election, will be more difficult to carry out because of the collusion of politics and business. Unlike the previous and transitory government formed by the socialist party and that of the Turkish minority (15% of the votes), the current one is affirming its European roots. However, the ties, cultural (Orthodox Christianity), economic (energy) and financial (through the banks), with Russia will remain.